Fed Still Debating Its Purchases of Mortgage-Backed Securities; Mortgage Rates Continue to Edge Down

January 18, 2009 - Long-term mortgage rates moved down slightly last week as some of the recent optimism regarding the economy waned. While industrial output increased a solid 0.6%, the increase was due largely to utility output related to the frigid weather gripping much of the nation. Additionally. December's Consumer Price Index rose only 0.1% last week, with a slight boost in food and gasoline costs. The core CPI, which excludes both food and energy, also increased by 0.1% after flattening the month prior. During the past twelve months, the overall consumer price index has risen 2.7%. While the number could be considered high on an historical basis, core inflation remains to stay low for at least several quarters.

U.S. retail sales unexpectedly dropped 0.3% this past holiday season. High unemployment, combined with cautious consumers led to the mild drop. The retail report follows the Federal Reserve's recent January Beige Book release, which stated that economic conditions were "modestly" improving. Despite the marginal decline, holiday retail sales were up nearly 3.4% from last December, showing a slight upturn since 2008.

While the market continues to point to a recovery in its early stages, the debate over what the Fed will do regarding its purchases of mortgage-backed securities is heating up. Many are beginning to expect a gradual decrease of the program over the next few quarters versus an abrupt stop of the program in March. Either way, the Fed's next move regarding the mortgage purchase program will likely have an strong impact on the direction of rates. We should however see rates slip just a little more next week if economic news continues to point to a slow path for economic recovery.

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